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India Inflation Tops Estimates; Fuel Rise May Stoke Prices

Indian inflation quickened more than economists estimated in August, an acceleration that may be stoked by the first rise in diesel tariffs in over a year.

The wholesale-price index rose 7.55 percent from a year earlier, after climbing 6.87 percent in July, the Commerce Ministry said in a statement in New Delhi today. The climb exceeds all 35 estimates in a Bloomberg News survey, whose median projection was 7.1 percent.

The pace of Indian price increases is the fastest in major emerging markets and above the central bank’s comfort level of about 5 percent. Governor Duvvuri Subbarao will leave interest rates at 8 percent for a third meeting next week, 32 of 35 economists said in another Bloomberg survey, as today’s diesel rise of about 14 percent to pare subsidies fans costs.

“Increases in fuel prices will exacerbate inflation and diminish any hopes of rate cuts in the near term,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai. “It shows the government’s serious intent to reduce the fiscal deficit, but it needs much deeper spending cuts to achieve its budget targets.”

The rupee surged 1.2 percent to 54.7525 per dollar as of 1:44 p.m. in Mumbai, while the BSE India Sensitive Index rose 2.4 percent, amid speculation the diesel-price action signals greater resolve to pare the budget gap to avert a credit-rating downgrade. The yield on the 8.15 percent government bond due June 2022 was little changed from yesterday at 8.17 percent.

Food Prices

The U.S. Federal Reserve’s decision yesterday to ease monetary policy also boosted sentiment, as Asian stocks rose for a seventh day and commodities climbed.

Food articles advanced 9.14 percent last month from a year earlier, today’s report showed. Non-food manufactured goods prices, a measure of core inflation, rose 5.58 percent compared with 5.45 percent in July, calculations by Bloomberg showed.

The Indian government announced the rise in diesel tariffs yesterday. It also said the number of subsidized cooking gas bottles for each buyer is to be limited to six a year. Gasoline and kerosene prices were left unchanged.

Prime Minister Manmohan Singh is trying to trim a subsidy bill for food, fuel and fertilizer by 12 percent to 1.9 trillion rupees ($34.7 billion) in the year through March 2013. The government is seeking to pare the budget deficit to 5.1 percent of gross domestic product, from 5.8 percent.

Interest Rates

The Reserve Bank lowered borrowing costs by 0.5 percentage point in April to 8 percent, the first reduction since 2009, and has said that move “frontloaded” a cut on the assumption the government will restrain the budget gap.

It left rates unchanged at the last two policy meetings, citing inflation risks including the 13 percent drop in the rupee against the dollar in the past year and crimped farm output from a below-average monsoon.

Curbing inflation is the central bank’s “top priority,” Reserve Bank of India Deputy Governor K.C. Chakrabarty said in a televised speech in Mumbai today.

The diesel-price increase will add as much as 72 basis points to wholesale-price inflation, keeping it at an average of 7.5 percent to 8 percent until December, Morgan Stanley said.

The combination of elevated inflation and weaker economic expansion makes India “somewhat of an outlier in the world,” Subbarao has said. GDP advanced 5.5 percent in the three months through June from a year earlier, a pace close to the three-year low of 5.3 percent in the first quarter.

Subdued expansion has affected companies such as motorcycle manufacturers, with sales in an industry that includes Hero Motocorp Ltd. and Bajaj Auto Ltd. down 4.5 percent last month, the first fall since January 2009, according to the Society of Indian Automobile Manufacturers.

Singh has struggled to revive growth amid opposition to steps to open up the economy from a fractious ruling coalition. The diesel move and signs India will open aviation to investment by foreign airlines may signal increased assertiveness.

The budget shortfall and a trade deficit led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.

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